ELITE ADVISOR BEST PRACTICES

Considerations When Seeking Referrals from Accountants

Advisors who educate themselves can access the best professional referral services

By Steven J. Insel

Key Takeaways:

  • Thanks to the nature and volume of their relationships with clients, accountants are among the best referral sources for advisors.
  • Be patient. The best referral sources are the professionals with the strongest client relationships, and those relationships are often their most prized asset. It can take time to gain the trust necessary to make accountants comfortable enough to refer their clients.
  • Be conservative. If you sell a failed product to a client you may lose the client. If you sell a failed product to a center of influence or other referral source, or one of its clients, you may lose dozens of current and potential future clients.
  • Decide if you are willing to participate in relationships in which fees or commissions are shared with accountants or entities that they own. Many larger financial services firms have formal alliance programs, so consult with your compliance department.
  • Be prepared to demonstrate an understanding of how any investments you offer fit in with tax and estate planning.


I have represented more than 20 accounting and business management firms concerning formal and informal relationships with financial services providers. I have represented national financial institutions in developing their alliance programs for accountants. I have observed many successes and failures, and have analyzed the factors common to each.

Formal programs with compensated referrals

Many accounting and law firms have set up formal programs with appropriate licenses to make referrals for compensation—a share of fees or commissions—often in a joint venture with an insurance agency or investment advisor. In the states that allow accountants to make referrals for compensation, there are strict regulations that apply. In addition, registration and licensing of the accountants involved can be a critical issue.

California is a prime example. In California, a CPA may not make a referral for compensation (including to an entity in which he or she has a significant profit interest) unless specified disclosure statements are first delivered. There can be no referrals of clients for whom CPAs provide audit services, or from officers and directors of certain of those clients. In addition, the CPA must give “professional advice” in conjunction with the referral. Other state regulators have interpreted this “advice” requirement to mean that registration or licensing is always required for a CPA making a referral.

For dual registrant broker-dealer/investment advisors, there was an important interpretive letter a number of years ago from the former NASD dealing with the issue of referrals from accountants. The letter stated that the accountants could make referrals to the dual registrant without registration as broker-dealer associated persons so long as long as they did not participate in any way in broker-dealer revenues, and as long as they only participated in investment advisor revenues.

If you approach an accounting firm about a formal, compensated relationship, you should be able to demonstrate that you are knowledgeable about the regulatory requirements involved in your jurisdiction.

Liability concerns

I have been called in to many situations in which the involvement of accountants in a referral relationship, whether formal and compensated or informal, is a key element in an arbitration, civil suit or regulatory action.

The quid pro quo is alive and well; we all know how the world works. And I have never seen a regulator question informal cross-referral relationships. But such tactics can go too far and come back to haunt those involved in a lawsuit.

The public perceives the accountant as the trusted advisor. If there is even an appearance that this trust has been abused, it can be a major problem. Many a shrewd plaintiff’s lawyer has used this point to great advantage. The examination under oath can be scathing. Some illustrations make the point.

Real-life examples

A plaintiff’s lawyer questioning an insurance agent: “Should it really have cost $30,000 to do your taxes and general accounting work, and why did you have to pay four different accounting firms for the same work?”

A plaintiff’s lawyer questioning a CPA: “Why did you refer so many clients to Adviser X?” Accountant: “Because of his quality as a professional.” Lawyer: “How did you make the determination that he was a superior advisor?” Accountant: “I saw the job he did for my clients.” Lawyer: “Well we analyzed his track record with your clients and it is extremely inferior. We will show you the documentation. Did you ever analyze his track record, or were your referrals just a quid pro quo for all the referrals to you, a bribe and conflict that was completely undisclosed to your clients by either you or the advisor?”

Restrictions in the Internal Revenue Code

There is one complex and quite serious limitation in the Internal Revenue Code related to accountants, or anyone, who prepares tax returns. IRC Section 7216, and the related regulations, provide for civil and criminal penalties for any person using or disclosing information provided by another person for the purpose of preparing tax returns, except in specific exempt instances (generally none are applicable to the sale of financial products or services) or with a specified form of consent. “Use” of information is broadly defined: In theory, either referring to or relying upon any information to take any action counts as “use.” The intricacies of this law are too lengthy for an article in the Elite Advisor Forum. Suffice it to say that anyone to whom such use of information might apply should become familiar with this law and how to avoid breaching it. (Note that there are ways to deal with this problem.)

What makes a successful relationship?

Be patient. The best referral sources are those who have the closest relationships with their clients. The business management firm is a prime example of the type of firm that tends to have very strong relationships with clients who rely upon its general advice. And those relationships—the firm’s client base—may be among the firm’s most valued assets. It can take time to gain the confidence necessary to entrust you with that asset. I have seen the hurried or hard-sell approach fail time and time again. Stressing safety, not aggressive returns, is generally best. And it is a great advantage if you are technically proficient and speak the language of the accountant, can engage in professional discussions and demonstrate an understanding of how the investment approach fits into estate and tax planning.

Be conservative. If you sell a failed product to a client you may lose the client. Sell a failed product to a center of influence or other referral source, or to one of their clients, and you may lose dozens of current and potential future clients. You may lose the chance at referrals from all the accountants or lawyers at a firm.

Do not assume that the accountants are necessarily sophisticated about investing. Many may be, but often the best professionals devote so much of their time to an intense focus on their own profession that they have little time to deal with other skill sets, like investing.


About the Author

Steven J. Insel is a partner in the corporate and securities law practice at Elkins Kalt Weintraub Reuben Gartside LLP in Los Angeles where he specializes in investment adviser and broker‑dealer matters, in addition to other areas of financial and professional services regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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